According to the BIS annual economic report for 2021, CBDCs can make significant changes to the financial industry.
BIS analysts believe that government digital currencies should be developed taking into account the public interest. Creating an “open space for payments” that will be equally accessible to individuals and legal entities. However, the effective functioning of CBDC depends on the structure of the underlying payment system and data management mechanisms.
Despite the advantages of government stablecoins, such as increased public access to financial services, as well as faster payments and lower costs of their implementation, their use can lead to ambiguous consequences.
The researchers explained that the widespread adoption of such digital currencies will contribute to the creation of segregated databases. As well as the dominance of central banks in the financial market. This will interfere with the free competition of commercial banks. However, BIS analysts concluded that government-owned cryptocurrencies could significantly improve international payments. Also reduce the risks of substituting fiat currencies with conventional stablecoins issued by private firms.
BIS believes that CBDCs will function most optimally if they operate on the principle of a two-tier system. It should involve commercial banks and other payment service providers who will take over most of the customer experience. Analysts noted the need to create state digital currencies using an identification system that will ensure data confidentiality and prevent illegal activity.
New digital payment system
“Digital currencies of central banks can lay the foundation for a new digital payment system. They will provide broad public access to financial services and ensure rigorous data governance standards. This is the best way to use digital money in accordance with the interests of society”, said Benoit Coeure, head of the BIS Innovation Center.
Earlier, BIS President Agustin Carstens said that only central banks can ensure the stability of digital currencies. So they must play a leading role in their development.
Central bank digital currency (CBDC) implementation
Central bank digital currencies (CBDCs) are moving from concept to implementation.
BIS estimates that at least 56 central banks and monetary authorities are now exploring digital currencies as commerce moves online.
This push comes as the use of physical money around the world dwindles and authorities seek to ward off threats to their ability to print money from Bitcoin and the efforts of “big technologies” such as the Facebook-backed Diem, formerly called Libra.
BIS’s Benoit Coeure warned that without CBDC, digital money will increasingly be dominated by large tech companies as they leverage huge social media user bases.
As a reminder, earlier BIS, together with the Bank of Switzerland and SIX Swiss Exchange, tested the use of wholesale CBDC in settlements on tokenized assets.
The institution will also take part in an experiment by monetary regulators of France and Switzerland. On the use of the central bank’s digital currency in cross-border settlements.